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Strong 4Q16 Earnings Drive Up Jack in the Box’s PE Multiple

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Valuation multiple

A valuation multiple helps investors decide whether to enter or exit a stock. A company’s valuation multiple is affected by its perceived growth, risk and uncertainties, and investors’ willingness to pay.

For this analysis, the valuation measure we’ve chosen is the PE (price-to-earnings) ratio due to the high visibility of Jack in the Box’s (JACK) earnings. The forward PE ratio is calculated by dividing the current share price by forecast EPS (earnings per share) for the next 12 months.

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JACK’s PE multiple

The measures adopted by JACK to improve same-store sales growth and reduce SG&A (selling, general, and administrative) expenses have prompted analysts to raise their EPS estimates for the next four quarters. That has increased investor confidence. The measures have led to a rise in JACK’s share price and PE multiple. The day after its fiscal 4Q16 earnings release, the company’s PE multiple rose from 20.8x to 22.1x.

From the above graph, you can see that Jack in the Box’s PE multiple is lower than its peers’ median. Since Jack in the Box owns and operates more company-owned restaurants, its margins are on the lower side. Also, Jack in the Box’s business model doesn’t allow it to expand aggressively, which might have led to the company’s lower valuation multiple.

On the same day, JACK’s peers Restaurant Brands International (QSR), McDonald’s (MCD), and Wendy’s (WEN) were trading at PE multiples of 27.8x, 19.5x, and 28.6x, respectively.

Risks and uncertainties

To improve its same-store sales growth, JACK has been focusing on improving the quality of its products and making menu innovations. The company has introduced its Brunchfast menu, which features a brunch burger, a Southwest Scramble Plate, and a bacon and egg chicken sandwich.

If these measures fail to generate the desired same-store sales growth, the increased expenses could put pressure on Jack in the Box’s margins and lower its earnings. Analysts expect the company to post a rise in EPS of 29.3% in the next four quarters. Its current stock price might have already factored in the rise in EPS. If the company’s results come in lower, the stock could face selling pressure.

You can mitigate company-specific risks by investing in the Consumer Discretionary Select Sector SPDR ETF (XLY). XLY invests 9.4% of its holdings in restaurant and travel companies.

Next, we’ll see what analysts are recommending for JACK.

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